Skip to main content

Is Bitcoin a Black Swan Event?

Op-ed - Is Bitcoin a Black Swan Event?

The term “Black Swan Event” describes certain events in history so profoundly unexpected and massive in scale, that they fundamentally changed the course of history. There are good Black Swans (the unpredicted rise of the internet), and bad Black swans (rise of Hitler).

The absurdity of a Black Swan ever existing was so outrageous during the middle ages it became a metaphor for the laughably impossible. In today’s world we might comparably say something about snowball’s chance in Hell. For many centuries, the metaphor existed until about the year 1700 they were discovered to actually to exist in Australia. Now it’s the symbol of the Western Australia flag.

Nassim Taleb , a Professor of Risk Engineering at New York University brought back the once familiar phrase in his 2007 best-selling book, “The Black Swan: The Impact Of The Highly Improbable”. The extremely influential book has been referenced numerous times by financial advisors, risk evaluators and CEOs attempting to divine meaning and predict the almost unpredictable. It has been called one of the most influential books since World War 2. This has made Professor Taleb a highly sought after speaker and lecturer. His theories are in stark contrast to his nemesis Paul Krugman whom he seems to delight in disparaging.

He writes:

History, proceeds by “jumps,” controlled by “the tyranny of the singular, the accidental, the unseen and the unpredicted.” Gradual change is only mankind’s paradigm view, yet actual change is “almost always outlandish.” (emphasis added)

Why it matters

Financial experts have found themselves wiped out by Black Swan Events. The sub-prime mortgage crisis wiped out thousands of businesses and brought entire countries to their knees. Companies must have a backup plan to make their companies less fragile. Catastrophic events, no matter how unlikely, can somewhat be planned for. Not necessarily specifics but by asking the right “what if” questions. By their very nature Black Swan Events themselves cannot be defined or predicted by definition they haven’t happened before. However you can study the results of those organizations, people, or survivors to study and learn how they dealt with the aftermath. This study can help prepare companies to build strategies to get back on their feet the quickest and minimize damage.

The Black Swan Theory isn’t a predictive one, but Taleb’s examples in history and a philosophy about expecting the unexpected and making one resilient has garnered a large following. Taleb made a fortune by making many small bets on improbable events, but making fortunes from the ones that do happen,

The basics tenets for his Black Swan Theory come in three major criteria. We’ll list the criteria and evaluate whether bitcoin meets the criteria.

1. The event is a surprise:

Before Bitcoin, there were no examples of a currency unbacked by a nation that could be transferred to anybody in the world without trust. Before the introduction of the internet it would have been impossible. Outside of a handful of extreme fringe Cryptologists the idea was ridiculous for governments and banking institutions to comprehend. There were no plans to control it or stop it, let alone take it serious enough until it was too late to kill it.

Number one qualification: Yes.

2. The event has a major effect.

The currency has thus far reached at its peak about 12 billion dollars in total worth. It was only about 2.5 of the value of Google the search engine company. However now most, if almost all countries in the world know of bitcoin and many have issued warnings or bans for its banking systems to not use it. Bitcoin has created a swell of world-wide supporters and a tight-knit community. It has politicians, bankers, regulators, investors, and scientists scrambling to understand it, control it, profit from it and use it as a catalyst to change the world.

Number two qualification: Yes.

3. After the first recorded instance of the event, it is rationalized by hindsight, as if it could have been expected.

If we look back at two widely recognized Black Swan Events, we can evaluate the hindsight rationalization. With the Internet, we can now see that because of all the personal computers that were purchased in the 80s and early 90s…it was OBVIOUS that they were going to eventually going to be connected to share in in electronic mail and read the news. For 9/11 afterwards, “experts” suddenly connected the dots of rising anti-Americanism in the radical parts of the Muslim world. They suddenly “remembered” the bungled attempt to bring the World Trade Center buildings down with a car bomb in the underground parking lot a few years earlier and it was “obvious” that this same kind of thing was going to happen again.

Is bitcoin yet being analyzed and rationalized using a lens of history? Are we at a point yet where we have enough data available for businesses to create risk mitigation programs? Perhaps the jury is still out on this one. It’s still in the beginning stages and history has yet to decide where this bitcoin experiment will sit in the annals of history.

Number three qualification: – Undecided.

One black swan event was perhaps the genesis of bitcoin’s birth: The subprime mortgage crisis which almost brought down the entire banking industry. Bad policy that encouraged home ownership and loans were provided for anybody who could fog a mirror. Bankers knew that, but it wouldn’t be their problem as they sold off the loans and became rich off from somebody else’s problem. When the loans went bad it set off a chain reaction that spread to massive insurance agencies and investment houses that all were linked to the bad debt. Of course looking back, it was OBVIOUS that this was bound to happen. That’s why credit reports exist. Loans that turn bad are not good for anybody. An army of Monday morning quarterbacks wearing suits and ties came out of the woodwork to tell the financial news world that they could see it coming all the time.

But what about bitcoin? Should not the man who coined the phrase in its current incarnation make that declaration? What does Taleb think about bitcoin? He sent a tweet on the subject on March 20 of 2013:

Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.

But I am not familiar with the specific product to assert whether it is the best potential setup. And we need a long time to establish confidence. I only talk from skin-in-the-game. If I had money in bitcoin, I would have reported it. But I don’t yet.

I am waiting to understand it better, not with my brain, but with my experience…

In May of 2013 he followed up with a tantalizing twist on the subject:

For bitcoin to make it, it needs to be banned by a few governments and critiqued by policy makers. Otherwise it will fade.

These words coming from the man who defined the term seems to indicate bitcoin’s fate may be remembered in mythical terms one day.

In the midst of the banking system crash, on Halloween of 2008, London’s BBS news website summarized the events on their website frozen in history. The headline read “Recession Fears Grip the United States”. Sometime that night, in a lonely badly lit basement room, a computer was hosting an obscure website dedicated to the tiny population of paranoid cryptologists. Silently and almost inconsequentially, a new message blinked into existence on a newsgroup forum. It contained a simple and plainly worded message from someone previously unknown.

The seemingly insignificant post title might have easily been ignored. It read…”Bitcoin P2P e-cash paper”. The message indicated it was from somebody calling himself “Satoshi Nakamoto” and the paper itself was uninterestingly titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. It sat there unread as fellow forum member cryptologists were dressed in Halloween costumes and otherwise engaged in cyberpunk parties for the night. The next day, although nobody at the time realized it – somebody finally read the message on the forum board and eventually word spread.

The world would never be the same. November 1, 2008 – was zero day.

Bitcoin may be that Black Swan we’ve been waiting for.